Define bonds? Explain how bonds are priced. Be sure to provide an example of a bond.
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Bond is a fixed income security. It typically pays a Interest amount at regular intervals & Principal amount at last.
It can be broadly of 2 types: Government or
Corporate.
The price of bond = present value of all future cash flows discounted at yield to maturity.
Example:
A bond has face value of 1000,
Matures in 4 years.
Coupon rate = 7%
Yield to maturity = 9%
Price =
[70/(1.09)^1]+[70/(1.09)^2]+[70/(1.09)^3]+[1070/(1.09)^4]
= 935.21
Therefore, price of the bond is equal to $ 935.21
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